For readers unfamiliar with the generation skipping transfer tax (GSTT), in its simplest form it is what it sounds like – a transfer tax that is triggered when an individual (transferor) bequeaths all or a portion of an estate to a person (skip person) that is two or more generations below them, with an age difference of 37 ½ years or more. The simplest and perhaps most common example would be a grandparent leaving assets to a grandchild.1
To be sure, navigating the GSTT can be a complex process, and for individuals with goals of gifting assets across generations and whose estates exceed the exemption amount ($5,450,000 in 2016),2 it’s important to consult an estate planning attorney and tax professional for help. But below we’ll offer three tips that may help reduce—or at least better control—the GSTT.
3 Ways to Minimize or Avoid the Generation Skipping Transfer Tax
- The Generation Skipping Transfer Tax Exemption – the GSTT exemption mirrors that of the estate tax exemption, which makes it $5,450,000 for 2016. But the GSTT is different in that the law allows the transferor to choose where to apply the GSTT exemption. So, in simple terms, it could make sense to place the excluded amount into one trust and then the balance of an estate into another trust. With the ‘excluded trust,’ the transferor would have the ability to not only control how distributions are made and to whom they go, but could also keep the transfer tax protection in place for multiple generations.
- Tuition and Medical Expense Exclusion – in many cases, when money is designated for grandchildren and future generations, it is with the hope/goal that the money can be used to help that beneficiary pay for some of life’s most important needs: education and health. Under current rules, when such expenses are paid directly to the service provider, these gifts are exempt from both gift tax and GSTT.
- The Annual Exclusion – the annual exclusion for the GSTT mirrors the gift tax annual exclusion, which in 2016 would be $14,000 per person per ‘skip person.’ So, for example, if two grandparents wanted to exercise the annual exclusion for their two grandchildren, they could give each grandchild $28,000, for a total of $56,000 in untaxed gifts each year.3
- There’s more: in the said ‘excluded trust,’ the transferor can make anyone the beneficiary of the trust, including spouse and children. So, in the words of TDAmeritrade, “you don’t have to skip a generation in order to generation skip. An important detail is to have access to the assets structured in such a way that the IRS does not consider the beneficiary an owner of the account.”1
Complex Issues Require Complex Planning
At WrapManager, our goal is to help our clients reach their investment objectives. Our expertise does not make us tax professionals able to offer our clients’ tax or estate planning advice. What we hope to accomplish in writing articles like this, is to remind clients of how complex many types of planning can be, and how strategic opportunities await those who are very thorough in their estate planning efforts. By reviewing your financial situation, a Wealth Manager at WrapManager can tell you what type of estate planning efforts you likely need to pursue, and help you to take the first steps towards getting it done.
Sources:
- TD Ameritrade
- IRS
- Investopedia